Considering Our Options – $PFE Jan Buy-Write

by CC December 1, 2015 12:27 pm • Education

On November 23rd Pfizer (PFE) officially announced their rumored takeover/ inversion of Ireland based Allergan (AGN). Both stocks sold of the day of the announcement and we felt the initial move was likely wrong and bought PFE stock and sold an upside call in January, creating a BuyWrite. Here was the trade:  

*Trade Idea: Bought 100 shares of PFE for $31.35 and sold 1 Jan16 33 call at .45

The stock has indeed bounced off that initial reaction and is now slightly above our short strike. The stock is obviously a winner and the call is a loser but the overall position is profitable. Here’s how that looks with PFE at $33.35:

  • Stock: +2.00
  • Calls: -0.75
  • Overall Profit: 1.25

So now we have decisions to consider. The calls are now 55 deltas so this is still a bullish position, despite the stock being slightly above our short strike. If the stock is here or above on January expiration this will be an effective sale in the stock at 33.45 for a 2.10 profit.

Another option to consider is rolling the short call higher, allowing more room in the stock and potential profitability. So let’s look at that. Let’s say we closed the Jan 33 call for 1.20, and sold the Jan 44 at .70. That would lock in the .75 loss on the 33 call but we would be left with a position with profit potential up to 33.95, not just 33.45. That could make sense at some point but we’d prefer to give the January options some time.

Remember, the position is still bullish and the current profits of 1.25 have the potential to be 2.10 with the stock higher. Rolling the short calls at this point would be adding to an already bullish position and there’s no reason to do that now. That view could change as we get deeper into December. The Jan 33 calls currently only decay about 1c each day but that will accelerate late in Dec, particularly around the Holidays as implied vol compresses as well. We’ll be patient and possible roll then, but since the position is still bullish, we’re fine with the stock going higher, and since it’s aggressively hedged with a short at them money call we’re fine with it pulling back a little as it would preserve the long stock and allow us to roll at some point.